BILL NUMBER: SB 1239	CHAPTERED  03/15/00

	CHAPTER   4
	FILED WITH SECRETARY OF STATE   MARCH 15, 2000
	APPROVED BY GOVERNOR   MARCH 15, 2000
	PASSED THE SENATE   MARCH 13, 2000
	PASSED THE ASSEMBLY   FEBRUARY 28, 2000
	AMENDED IN ASSEMBLY   FEBRUARY 15, 2000
	AMENDED IN ASSEMBLY   SEPTEMBER 10, 1999
	AMENDED IN SENATE   APRIL 5, 1999

INTRODUCED BY   Senator Burton and Assembly Member Migden

                        FEBRUARY 26, 1999

   An act to amend Section 23040.1 of the Revenue and Taxation Code,
relating to taxation, to take effect immediately, tax levy.


	LEGISLATIVE COUNSEL'S DIGEST


   SB 1239, Burton.  Corporations:  partnership investment income.
   The Bank and Corporation Tax Law provides that income from sources
in this state is generally taxable.  The law exempts from taxation
the distributive share of interest, dividends, and gains from the
sale or exchange of qualifying investment securities derived by a
corporation that is a partner in a partnership that qualifies as an
investment partnership, if the income from the partnership is the
only income of the corporation derived from sources in this state.
This exemption does not apply if the corporation participates in the
management of investment activities or is engaged in a unitary
business with another corporation that meets specified
qualifications.
   This bill would provide that the exemption shall also apply to
income, gain, or loss from stocks or securities received by an alien
corporation whose sole activities in this state involve trading in
those stocks or securities for the corporation's own account, with
specified exceptions.
   This bill would take effect immediately as a tax levy.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:


  SECTION 1.  Section 23040.1 of the Revenue and Taxation Code is
amended to read:
   23040.1.  (a) Notwithstanding Sections 23040 and 25101, income
derived from or attributable to sources within this state shall not
include:
   (1) The distributive share of interest, dividends, and gains from
the sale or exchange of qualifying investment securities derived by a
corporation that is a partner in a partnership that qualifies as an
investment partnership under Section 17955, whether or not the
partnership has a usual place of business in this state, if the
income from the partnership is the corporation's only income derived
from or attributable to sources within this state.
   (2) Income, gain, or loss from stocks or securities received by an
alien corporation whose sole activities in this state involve
trading in those stocks or securities for the corporation's own
account within the meaning of Section 864(b)(2)(A)(ii) of the
Internal Revenue Code, whether the trading is done by the corporation
or its employees or through a resident broker, commission agent,
custodian, or other agent, and whether or not any such employee or
agent has discretionary authority to make decisions in effecting the
transactions.  This paragraph does not apply to a dealer in stocks or
securities.
   (b) (1) Paragraph (1) of subdivision (a) shall not apply to a
corporation that participates in the management of the investment
activities of the investment partnership or that is engaged in a
unitary business with another corporation or partnership that
participates in the management of the investment activities of the
partnership or has income derived from or attributable to sources
within this state other than income described in paragraph (1) of
subdivision (a).
   (2) Paragraph (2) of subdivision (a) does not apply to an alien
corporation that itself has, or that is engaged in a unitary business
with another corporation that has, income derived from or
attributable to sources within this state other than income described
in paragraph (2) of subdivision (a).
   (c) An alien corporation (other than a dealer in stocks or
securities) trading in stocks or securities for its own account, as
described in paragraph (2) of subdivision (a), is not doing business
in this state for purposes of Chapter 2 of this part.
   (d) For purposes of this section:
   (1) "Alien corporation" means a corporation organized under the
laws of a country, or any political subdivision thereof, other than
the United States.
   (2) "Dealer in stocks or securities" means a dealer in stocks or
securities for purposes of Section 864(b)(2)(A)(ii) of the Internal
Revenue Code.
   (3) "Investment partnership" means a partnership that meets both
of the following requirements:
   (A) No less than 90 percent of the partnership's cost of its total
assets consist of qualifying investment securities, deposits at
banks or other financial institutions, and office space and equipment
reasonably necessary to carry on its activities as an investment
partnership.
   (B) No less than 90 percent of its gross income consists of
interest, dividends, and gains from the sale or exchange of
qualifying investment securities.
   (4) (A) "Qualifying investment securities" include all of the
following:
   (i) Common stock, including preferred or debt securities
convertible into common stock, and preferred stock.
   (ii) Bonds, debentures, and other debt securities.
   (iii) Foreign and domestic currency deposits or equivalents and
securities convertible into foreign securities.
   (iv) Mortgage- or asset-backed securities secured by federal,
state, or local governmental agencies.
   (v) Repurchase agreements and loan participations.
   (vi) Foreign currency exchange contracts and forward and futures
contracts on foreign currencies.
   (vii) Stock and bond index securities and futures contracts, and
other similar financial securities and futures contracts on those
securities.
   (viii) Options for the purchase or sale of any of the securities,
currencies, contracts, or financial instruments described in clauses
(i) to (vii), inclusive.
   (ix) Regulated futures contracts.
   (B) "Qualifying investment securities" does not include an
interest in a partnership unless that partnership is itself an
investment partnership.
   (5) "Stocks or securities" has the same meaning as applies to that
phrase as used in Section 864(b)(2)(A)(ii) of the Internal Revenue
Code.
   (e) The amendments made to this section by the act adding this
subdivision shall apply to income years beginning on or after January
1, 1999.
  SEC. 2.  This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.
